2/21/2007 @ 6:00PM

AT&T-Microsoft In Patent War

The Supreme Court is expected to rule soon on a relatively obscure point of patent law that could have wide effects on the amount consumers pay for computer software and other intellectual property licensed overseas.

On Wednesday, the court heard arguments in the case Microsoft vs. AT&T, which focuses on the extent to which U.S. patent law applies in other countries. But the justices’ ultimate interpretation of the law is not the only thing at issue here.

Microsoft
says the software industry stands to lose “billions” if the court does not rule in its favor.
AT&T
is seeking an undisclosed amount of revenues over its claims that Microsoft illegally used an AT&T-patented voice recording technology in copies of the computer company’s flagship Windows software sold overseas.

Insiders and analysts say it is virtually impossible to put a dollar amount on the case. But most agree that if the court sides in AT&T’s favor, as two lower courts have done, software companies would be increasingly vulnerable to patent infringement abroad.

According to Roger Kennedy, chief patent counsel for
Oracle
and a spokesman for the Coalition for Patent Fairness, which has sided with Microsoft, any damages incurred by these companies “ultimately [are] going to get passed on to the consumer in prices.”

The tech industry is also concerned that its members might have to move their research and development activities overseas, out of the reach of U.S. patent laws, if the court decides in AT&T’s favor.

Aside from monetary retribution, AT&T is seeking to bolster the validity of its intellectual property. The company is worried that a decision in Microsoft’s favor would create uncertainty around the enforceability of its patents, which could stifle innovation.

“Our intellectual property licensing program is focused on maximizing global access to AT&T innovations, while also ensuring that investments in research and innovation are valued fairly and appropriately,” says Abha Divine, president and chief executive officer of the company’s subsidiary, AT&T Knowledge Ventures.

AT&T says that Windows contains a so-called “digital speech coder” that AT&T has patented for use in mobile and personal phones. Microsoft does use a similar technology in its software. The two companies have settled for an undisclosed amount over AT&T’s claims that Microsoft violated patent law when it sold Windows software to computer manufacturers in the U.S.

However, the issue becomes trickier when foreign sales are involved. Microsoft puts master versions of Windows on “golden master disks,” which are then sold to foreign computer makers, who copy Windows for foreign use. AT&T believes that U.S. copyright law should apply in these instances. Microsoft feels that patent laws in foreign countries should apply.

“The fundamental question before the Court is whether the United States should be able to apply its patent laws unilaterally beyond its borders,” says Microsoft Senior Vice President and General Counsel Brad Smith. “If it does, U.S. high-tech companies such as Microsoft will be disadvantaged compared with overseas competitors.”

The Supreme Court–rather than a foreign court–is considering the case because it involves interpretation of U.S. law. The court is expected to hand down a ruling on the matter sometime before the current term ends in June.

Chief Justice Roberts has recused himself from the case, meaning that five out of eight justices will need to be convinced that the U.S. Court of Appeals for the Federal Circuit was incorrect when it ruled in AT&T’s favor.

This might not be as difficult as it sounds. The three-judge panel of the Federal Circuit Court was divided on the case. Several big names in the tech industry have filed friend-of-the-court briefs on Microsoft’s behalf, including
Yahoo!
, the Software and Information Industry Association and the Business Software Alliance, which represents companies such as
Adobe Systems
,
Apple
and
Dell
.

But the heaviest hitter in Microsoft’s corner is the U.S. government itself. Solicitor General Paul Clement filed a brief with the Supreme Court in December supporting the software giant, saying, “United States software companies will find themselves at a substantial competitive disadvantage in foreign markets and may even be foreclosed from competing in those markets altogether” if the court does not rule in Microsoft’s favor.

Based on the legal briefs filed in the case, the court appears likely to side with Microsoft on the issue, says Rebecca Arbogast, a lawyer and vice president of Stifel Nicolaus, a market research firm. However, she adds that based on the court’s questioning of both sides Wednesday, the outcome is not entirely certain.

“The stakes are potentially high,” Arbogast says, noting that the global economy was more limited, particularly concerning computer software, when the original patent laws in question were written.

In her analysis of the case, she says the Federal Circuit Court’s decision, if upheld, “would create massive liability for high-tech companies operating in the United States, including biotech, semiconductor, software and Internet companies that rely on information created in the United States that is transferred abroad by computer code.”